CRYPTOCURRENCY INTEREST: What is it and How does it work?
Certain DeFi platforms enable holders of cryptocurrencies to build new streams of income from their assets. Crypto Savings Accounts are gaining popularity because of the benefits they offer to holders of such accounts.
Between June 2020 and January 2021, such (DeFi) applications grew from a value of about $1 billion to about $40 billion.
Interest-earning crypto accounts work in the same manner as traditional savings accounts. Users deposit their crypto holdings into an account held by a centralized or decentralized saving platform and the platform rewards them with regular interest payments. The major differences between the crypto savings account and traditional savings account are
· Cryptos appreciate in value during the lending period, unlike fiat currencies.
· Crypto Savings Accounts offer much higher interest payments than traditional savings accounts.
The interest rates offered by crypto savings platforms are astronomical as compared to traditional savings accounts. For example, BlockFi, a crypto savings platform, offers its users rates of 0.10% to 9.50%. Celsius, another savings platform, offers rates from 9% to up to 17% in some cases. On the other hand, traditional savings accounts with the highest rates tend to hover between 0.50% and as low as 0.06%.
Unlike traditional institutions, DeFi platforms are able to offer such astronomical rates because they are able to make out loans at high interest rates using savings from users. Crypto Savings platforms typically make out loans to individuals, corporations, or institutions who need the funds.
For investors who are worried that volatile crypto prices will lead to a gradual erosion of their investments, stablecoins are an option. Stablecoins are cryptocurrencies whose value is pegged to an asset, usually the U.S. dollar. This protects investor funds from volatility and creates an oasis of stability in the volatile crypto markets. Popular stablecoins include: BUSD, DAI, Tether and USDC.
DIVIDENDS: What is it and How does it work?
Dividends are regular payments made by a company to its stockholders from profits made during the course of a period. Dividends represent a return on investment for stockholders. It can be paid monthly, quarterly, semi-annually, and annually.
Dividends are paid on each share that an investor owns. So if the company is paying $10 per share and an investor holds 10,000 shares, the investor will be entitled to $100,000 worth of dividends for the period.
Types of Dividend:
Cash. This is the most common type of dividend. Companies making this kind of dividend payment usually pay cash directly into shareholders' brokerage accounts.
Stock. This is an alternative to paying cash that is particularly attractive to companies which want to retain profits but still want to reward stockholders.
Dividend Reinvestment Programs (DRIPs). Companies that employ this approach allow investors to purchase more stock at a discount using the dividends they receive.
Special Dividends. This method is usually adopted by companies that have accumulated profits over years for which they have no immediate use. This irregular dividend is distributed to stockholders across board.
Preferred Dividends. This dividend is primarily for holders of preferred stock, it is paid quarterly, and is usually a fixed sum.
CRYPTO INTEREST PROS AND CONS
Pros of Earning Interest on Cryptocurrency:
Higher Interest Rates: Holders of savings accounts will earn higher interest from their crypto savings than they will from traditional savings accounts.
Low or No Minimum Lock-up Time: In case of an emergency, it is much easier to gain access to saved crypto funds than traditional funds, as DeFi savings platforms usually offer low or no Minimum lock-up times.
Potential for Interest Growth: As the underlying crypto asset increases in value, the value of the interest derived from the crypto savings account will also increase. An investor who saves $10,000 worth of cryptocurrency at 8% interest should receive $800, however if the cryptocurrency rises in value to $20,000, the investor will receive interest payment worth $1,600.
No Minimum Amount: Crypto savings platforms allow users to start saving with whatever amount they have available, unlike traditional financial institutions which usually have minimum saving thresholds.
Cons of Earning Interest on Cryptocurrency:
Floating Interest Rates: While interest rates are usually higher, the value of interest payments are subject to market forces like demand and supply. This means the value of interest payments could drop as a result of a fall in the value of the underlying crypto asset.
No Regulation: The lack of regulation and oversight of DeFi platforms means investors are highly susceptible to scams posing as legitimate savings platforms.
No Insurance: DeFi saving platforms are usually not insured by any Federal deposit insurance organization, which means investors will have no safety-net if the DeFi platform goes bankrupt.
Risk of Borrower Default: As with all loan providers, DeFi saving and lending platforms face the risk of borrowers being unable to pay back their loans. This risk is further compounded by the reality that the crypto assets used as collateral to secure the loan could crash in value overnight, making recovery near-impossible if the platform doesn't have safety measures in place.
DIVIDEND PROS AND CONS
PROS Of Dividend Investing:
Safety from Volatility: The stock market is similar to the crypto market in that both markets are very volatile and unpredictable. Dividends are an attractive option for investors who are interested in the stock market but still crave safety. Rather than playing the markets, investors can purchase stock of mature and stable companies and enjoy regular dividend payouts.
Passive Income Stream: Dividends represent a reliable passive income stream for investors. Funds from received dividends can then be diverted towards other investments while at the same time reaping the rewards of the rise in value of the underlying stock.
Dividends Offset Inflation: The value of dividend payments regularly rise, which helps investors offset rises in the level of inflation in the broader economy.
CONS Of Dividend Investing:
Lower Long-Term Returns: No matter how frequently the value of dividend payments rise, they will eventually level-off. There is no debating the value of the safety that that dividends provide, but other investment strategies provide chances of much higher returns over the long-term.
Management Goals May Not Align with the Investor's Goals: Dividend payments arre contingent upon management continuing to favor the disbursement of payment. However, if the economic situation changes, or the company changes its budgeting and allocation policy, dividend payments could be reduced or stopped entirely. This would disrupt the strategy of a passive investor.
Double Taxation: Unlike other investment strategies, a passive income strategy hinged on dividend investing would create a situation where the dividend is taxed twice by the government. The first tax is levied on the income of the organization, and the second tax is levied on the dividends paid to the investor.
Dividends are still highly susceptible to Market movements: Although passive investors embrace dividend investing because of the relative safety compared to trading the stock market, their dividends are still susceptible to market movements. A sharp decline in the value of a stock resulting from traders betting against it could lead to management making different capital allocation decisions which would lead to a decline in dividend payments.
CONCLUSION
Cryptocurrency interest and dividend investing are strategies that will appeal to different investors. While crypto savings accounts will be more attractive to investors willing to bear the risk and reap the high rewards of crypto savings, dividend investing will be more attractive to investors who prefer stability and are willing to sacrifice the potential for astronomical rewards in exchange for the predictability and low yields of dividend payments.
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